Systematic liquidity and leverage

Kahraman, Bige and Tookes, Heather (2017) Systematic liquidity and leverage. Saïd Business School Working Paper.

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Abstract

Does trader leverage exacerbate the liquidity comovement that we observe during crises? Using a regression discontinuity design, we exploit threshold rules governing margin eligibility in India to analyze the impact of trader leverage on systematic liquidity. We find that trader leverage causes sharp increases in comovement during severe market downturns, explaining about one third of the increase in liquidity commonality during these periods. Consistent with downward price pressure due to deleveraging, we also find that trader leverage causes stocks to exhibit large increases in return comovement during these periods of market stress.that leverage causes stocks to exhibit large increases in return comovement during crises.

Item Type: Oxford Saïd Research Paper
Keywords: Finance
Subject(s): Finance
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Date Deposited: 11 Nov 2016 16:06
Last Modified: 26 Oct 2018 14:21
Funders: N/A
URI: http://eureka.sbs.ox.ac.uk/id/eprint/6246

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